Are you losing money on VAT in your construction business? Do you feel like you are missing opportunities? Follow this video or read below where I will explain more.
Vat Registration
You may be a startup business or already established your business and getting close to the VAT threshold. I also have a video about VAT Registration, where I talk about how and when to register.
However, is your business registered for VAT? If not, you need to monitor your numbers regularly so you don’t miss when you reach the threshold and risk penalties.
If you get to a certain size of business, you haven’t got a choice; you need to register. But you will have the benefit of claiming back that VAT on your expenses.
Who Can Claim VAT?
As a construction business, you can claim VAT back if you are VAT registered. So this means all services and products you buy with VAT added to it, you can claim back VAT on these costs.
In the construction industry is really important who is the end user.
A VAT-registered business is not going to care whether you’re VAT registered or not because they can reclaim the VAT on their own VAT returns. But if you are working for a residential customer, for example, forking on someone’s house renovations, they won’t be able to claim the VAT back.
When to claim VAT?
Normally VAT Returns are submitted on a quarterly basis.
When you first register for VAT, you’ll have a schedule with your VAT return quarters. If your VAT quarters are not in line with your year-end, you can change the schedule with HMRC, as this makes everything easier to reconcile.
There is also an option to submit VAT returns monthly. This can be beneficial mainly for developers; if they’re building a new build from scratch, this will be zero-rated, which means they’ll be getting constant refunds.
The downside of that is you must be organised with your paperwork. So, if you’re scattered and need more time to find things, monthly VAT returns may not be your best solution.
But if you have the systems in place, and you’ve got the records absolutely nailed, who would not want the money in monthly for the project because that will aid your cash flow to buy more products?
How to Claim VAT?
VAT is calculated when you take all the VAT on your sales less the VAT on your purchases.
However, in the construction industry, there are a few things that are slightly different.
Reverse Charge VAT
If you are a contractor and you’re invoicing another subcontractor, in layman’s terms, you won’t have to charge VAT on that income. This is great because you get a bigger chance of getting refunds.
But the downside is you’re not getting the ability to have that cash in your business that you can use to boost your cash flow.
VAT Relief on Bad Debts
There are two schemes under VAT that you would normally apply for; these are the following: invoice basis and cash accounting schemes.
Cash accounting is a method where VAT is accounted for based on actual cash flows. Under this system, VAT is recorded when payment is received from customers or made to suppliers rather than when invoices are issued or received.
Invoice basis accounting, also known as accrual accounting, is the traditional method of accounting for VAT. VAT is recorded when invoices are issued or received, regardless of whether payment has been made.
So, vat relief from bad debts will be, if you’ve got a debt that’s been written off and you’ve got a notification that they’ve gone into liquidation, you could write it off at that point.
Otherwise, if you are on an invoice accounting basis, for Vat, you can only write your invoice off after six months; if you’re not collected and registered for VAT, you can’t invoice and reclaim it.
Is a good idea not to register for VAT?
On occasions, if you’re a construction business, it may be, it may be a good idea for you not to be VAT registered.
As an example, if you’re working mainly with residential customers who are consumers, they won’t want you to be VAT registered because that means your fees are going to be 20% more expensive. The downside of that is if you buy materials on behalf of the customer, you won’t be able to claim back the VAT on these.
If you’re highly labour service only and your income is under £85,000, this can be beneficial for your business.
But if you’re looking to scale your business to a bigger height than this, you will have to become VAT registered.
Accounting Systems
There are loads of tools to help you in the industry.
The main accounting package we use for our clients is called Xero. It’s great for collecting and processing information.
It also has a great extension called Hubdoc. This allows you to take photos of your receipts and upload them to your accounting software. This saves you a lot of time, and you don’t have to keep endless files of paperwork.
We work with construction businesses a lot. So, if you’ve got any questions that I can help with, or you’d like to chat further to see how we can help, please click my link below and jump on a discovery call with me.
I promise there’ll be no pushy sales pitch, and I’ll do my best to give you as much value as possible in that time.
